Although, I didn’t see him mention it (and maybe it will be in his upcoming book “Free”), there’s something strategically special about free. Simply, it’s as if producer incentives are as they would be in perfect competition.

What do I mean? Let’s take, for example, Google Analytics (a free service offered by Google). We certainly can assume that Google offers the service for free because it indirectly increases the quality of advertising on search results. But offering the service for free has costs (labor, technical support, etc..). Let’s imagine that it wouldn’t take much cost to turn the service into a losing venture for Google.

Now, Google could charge a price for the service. They’ll lose market share, but it would more certainly make the service sustainable. BUT because Google has some market power, we could speculate that the incentives of the developers would be to lower the quality of the product in order to make more money. For instance, if the service charged per minute of use, we might expect the developers will create interfaces that are a bit more complicated and take more time to use. This would normally be tempered in perfect competition (but, hey, we don’t have an infinite set of web analytics producers). Google could pay users to use the service. Obviously, we can expect that would distort incentives such that users would only use the service to get a bit of money.

What’ left? Exactly, free. When offered for free, Google increases market share as much as possible (and increases the utility derived indirectly from search). Consumers consume as much as they want. More importantly, the developers of the service have a huge incentive to decrease the cost of production as much as possible. We might speculate that decreasing costs correlates with increasing quality. For instance, less demand for technical support (a cost) means that the service is of higher quality.

Simply, Google Analytics is competing against themselves! And competing against one’s self looks a whole lot like perfect competition.

June 17, 2007

Participants in the blogosphere usually lack an economic incentive. They are not involved in any kind of trade, and most of the time they have little to gain or to lose. If they spread falsehoods, or simply offer their opinion, they do not sacrifice a thing.

I’m not certain I totally agree. Bloggers sacrifice time or attention. They have an opportunity cost and, thus, choose to forgo other opportunities to blog. Most importantly, they forgo making money. I suspect as information increases in accessibility opportunity cost will increase. In other words, individuals will be more selective in what they contribute because there so many other things they could have been doing.

June 6, 2007

Recently, MasterCard ran a fairly structured, fill-in-the-blank consumer-created “Priceless” campaign. And even within the structure of the program “we were hard-pressed to find a lot of good ads,” she said.

What incentives do consumers have to create advertising that is effective in generating clicks, leads, sales, or whatever. A payment scheme linked to something measurable (e.g. clicks) would be more effective in inducing a consumer to create something of value.

July 8, 2006

Incentive-centered design is a new and promising approach to solving problematic issues in the design of complex software, websites, or information systems. In short, the idea is to give users incentives to adopt behaviors that are socially beneficial (i.e. it’s not just about the user). A more elaborate definition can be found here. For instance, spam is a common problem because users have misaligned objectives (i.e. spammers want to send spam, but recievers don’t want spam). “Improving Email Service with Markets“, a project at the University of Michigan’s School of Information, provides a possible solution to spam.

Simply recognizing that users have misaligned objectives and designing incentive-compatible mechanisms can vastly improve the user experience. I had a previous experience with a seemingly trivial software feature that was attentive to incentives. Flash, a software that use quite frequently, comes bundled with a scripting language. When I type in the scripting pane a contextual menu will pop-up to give me the next available options. The caveat, though, is that the menu will only appear when I use a certain naming convention (as defined by Macromedia or uhh… Adobe). For a while I was perplexed by this. It seemed that from my experience with programming it would have been easier to make the menu always appear. Wouldn’t that provide a better user experience? Why would Macromedia design it this way?

Well… it’s about incentives. Flash is typically used as a single user desktop application, but Macromedia has been pushing it towards a collaborative development environment. One hang up (and there are probably others) is that users might find it difficult to share documents if they are written with different naming conventions, and, thus, avoid collaboration. Even if users do recognize the value of collaboration, coordinating on which naming convention to adopt is difficult from the user perspective. To put it concisely, Macromedia rewards users with a better user experience if they adopt their naming convention. Even I eventually and reluctantly adopted the naming convention.

The more interesting take away is this. Organizations with a large user base might be in best position to design incentives that allow coordination and collaboration on activities that would have not been possible otherwise.